According to older studies, how many stocks are generally needed for proper diversification?

The notion that around 20 stocks can provide sufficient diversification is supported by various financial studies that analyze the reduction of non-systematic risk through diversification. When investing in stocks, holding a concentrated portfolio increases the risk associated with individual companies. As more stocks are added to a portfolio, the idiosyncratic risks—those risks unique to individual companies—tend to offset each other, leading to a smoother overall portfolio performance.

Research indicates that holding approximately 20 different stocks can significantly reduce the impact of the performance of any single company on the overall portfolio, ideally achieving a level of diversification that limits the exposure to unsystematic risk. This means that while there may still be risk associated with market movements (systematic risk), the risks attributed to individual firms can be mitigated effectively with this number of holdings.

While more stocks can potentially offer increased diversification, as investors may look to diversify across different sectors or market segments, the consensus around 20 stocks generally balances practicality with risk management effectively. Therefore, the concept surrounding this figure is a foundational principle of investment strategy within portfolio management.